Analysts: A Sprint/T-Mobile deal would face an uphill battle with regulators

A Sprint (NYSE:S) offer for No. 4 carrier T-Mobile US (NYSE:TMUS) is still very much a rumor, a far-off one at that. However, many analysts don't think such a deal could pass muster with regulators in Washington for a variety of reasons, even if both are much smaller than larger competitors Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T).

According to a Wall Street Journal report, Sprint is studying potential regulatory concerns of the deal, and it might make an offer in the first half of next year, with a deal valued at as much as $20 billion. Combined, the No. 3 and No. 4 carriers would have 52 million postpaid subscribers, compared with AT&T's 72 million and Verizon's 95 million. According to Strategy Analytics, a combined Sprint and T-Mobile would count a total of around 99 million customers, compared with AT&T's 109 million and Verizon's 119 million.

Although that may make it seem like the deal could sail through on antitrust grounds, analysts say that any combination between Sprint and T-Mobile would face an uphill battle, especially if it is launched next year.

"Despite being a more palatable merger than AT&T/T-Mobile on pure antitrust grounds, we believe a Sprint/T-Mobile tie-up probably would face the same fate--a challenge by [the Department of Justice] and the FCC," Paul Gallant, an equities analyst Guggenheim Securities, wrote in a research note Monday, according to CNET. "We believe regulators are very pleased with T-Mobile's resurgence and its aggressive, innovative moves and would not want to see it disappear via acquisition."

Medley Global Advisors analyst Jeffrey Silva wrote in a research note that any Sprint/T-Mobile tie-up "should be viewed within the context of a variety of factors and forces that might provide useful policy guidance."

He noted that when the Justice Department sued to block AT&T's proposed takeover of T-Mobile in 2011, it "indicated a preference for four national carriers and specifically highlighted T-Mobile's role as value leader/disrupter in the wireless space." Additionally, "in a different context, a filing earlier this year on the FCC's spectrum aggregation rulemaking, DoJ again spoke about competition in the wireless space as a driving force for innovation and multifaceted consumer benefits."

Further, as CNET noted, FCC Chairman Tom Wheeler said during a question-and-answer session at Ohio State University earlier this month that for the upcoming wireless spectrum auctions he would like to keep four major wireless competitors in the market. "The mobile business is today with four carriers a competitive business." he said. "And it's important it stay that way."

Additionally, T-Mobile has spent this year carving out a distinct identity under CEO John Legere as the "uncarrier," and merging with another operator would seem to fly in the face of that strategy. The strategy seems to be working as well--T-Mobile added 2.1 million total customers in the second and third quarter alone.

T-Mobile's success and SoftBank's acquisition of Sprint this year, along with Sprint's plans to deploy 2.5 GHz on a nationwide basis for faster TD-LTE service, likely validate the DoJ's reasoning that four national competitors make for a healthier wireless market in terms of competition.

"The issue then is one of sustained competition of Sprint and T-Mobile in the 4G LTE market," Silva wrote. "If either or both companies show signs of wavering/faltering quarter-after-quarter as the 4G LTE market further develops, we believe the regulatory case for a Sprint/T-Mobile merger will become substantially stronger. Indeed, we would not be surprised to see the U.S. wireless market come to settle at three national operators in time. We just don't believe federal regulators and antitrust officials would be comfortable with facilitating such a market structure shift at this juncture."

For more:
- see this WSJ article (sub. req.)
- see this CNET article
- see this BusinessWeek article
- see this Washington Post article
- see this PC Magazine article

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